If you have a company year end that ties with the calender year, it will soon be time to start planning.
No two years are the same in business and that is just as true for planning what to do with your company’s profits at the year end. Successive Chancellors have tweaked the tax rules in many areas, so that every time 31 December rolls round the picture is slightly different. 2011 is complicated by a variety of measures:
Income tax
In 2011/12 the starting point of higher rate tax (40% on earnings, 32.5% on dividends) is £1,400 lower than it was in 2010/11 because of changes to the basic rate band (down £2,400) and the personal allowance (up £1,000). We already know that there will be no change in the starting point for higher rate tax in 2012/13.
National insurance contributions (NICs)
The main rates for employers and employees all rose by 1% for 2011/12, but the size of the band subject to the full employee rate (normally 12%) shrank.
Capital gains tax (CGT)
The lifetime limit for entrepreneurs’ relief, which reduces the rate of tax on gains on business assets to 10%, was doubled to £10 million for 2011/12. Corporation tax The small profits (formerly smaller companies’) corporation tax rate fell by 1% to 20% from April 2011. The mainstream rate dropped by 2%, to 26%.
Capital allowances
The annual investment allowance (a 100% allowance for plant and machinery expenditure) remains at £100,000, but will fall to £25,000 from April 2012. From the same date the main writing down allowance for plant and machinery will be cut from 20% to 18%.
Pension contributions
New rules for pension contributions and benefits mean several changes to your pension options, as we explain in ‘Pension planning for 2012/13’.
Summary
There is no simple rule of thumb for the impact of this amalgam of past and future changes. In the final analysis, your 2011 year-end planning will be driven by your, and your company’s,
circumstances. However, there are several areas worth reviewing:
- You may want to maximise your pension contributions this year, because:
- You want to exploit carry forward from 2008/09; or
- You will be claiming fixed protection and ceasing company contributions from 2012/13.
- Bringing forward investments in plant and machinery could make sense because the reductions in the annual investment allowance and capital allowance rates will start to take effect in your company’s next financial year.
- If you want to extract income from your company, you should consider drawing dividends rather than salary to save NICs. This year the numbers are even more convincing, as the table shows.
Bonus Vs Dividend in 2011
| Bonus £ | Dividend £ | |
|---|---|---|
| Marginal Gross Profit | 50,000 | 50,000 |
| Corporation Tax | N/A | (10,125) |
| Dividend | N/A | 39,875 |
| Employer’s NIC’s £43,937 @ 13.8% | (6,063) | N/A |
| Gross Bonus | 43,937 | N/A |
| Director’s NIC’s £43,937 @ 2% | (879) | N/A |
| Income Tax | (17,575) | (9,969) |
| Benefit to Director | 25,483 | 29,906 |
Assumptions:
- Company’s marginal corporation tax rate is 20.25% for calendar year 2011.
- Director’s marginal income tax rate for 2011/12 is 40% (32.5% for dividends less 10% tax credit).
- The personal service company rules (IR35) do not apply.
If you wish to explore these options further, why not call us to arrange a meeting?